Aircraft MRO: Outsourcing versus In House Capabilities
Reasons why an MRO company decides to outsource can vary greatly. The illustration below provides some of the key factors that affects and influence aircraft MRO outsourcing decision-makings.
Outsourcing allows MRO organisation to focus their activities that represent the core competencies in airframe maintenance, hence allowing them to retain a competitive advantage while reducing costs to meet and match the cyclic nature of the MRO industry. From the financial and cost management aspects, on some capabilities, MRO may have the advantage to leverage existing capabilities within surrounding supply chain, hence reducing the need for investments and duplicating capabilities. Most of the outsourcing decision making focus around to support the need to improve productivity and performance of the core competencies in airframe MRO. At the same time, MRO outsourcing vs. in-house capabilities decision making also take into consideration the ability to be flexible to the changing future demands with a goal to reduce the fixed costs as much as possible. Based on the above reasons and criteria, we can identify functions or capabilities as a potential outsourcing target and breaking that functions into its smaller components of activities which allows us to identify which are critical and should remain in house and which can be outsourced especially commodities functions.
However, theory is easier said than done. The big question still remains of whether the benefits and results of outsourcing can be realised as expected by MRO managers. There are many outsourcing advantages such as greater flexibility – pay per use concept, low investment risks which in turn will improve cash flow. But there are quite significant drawback with outsourcing if not done carefully – you may end up partnering with the wrong suppliers – with so many unexpected hidden costs, especially logistics costs. You have no control over its processes and potentially losing the “core supportive” activities, which in the end will ultimately affect the MRO companies overall delivery performance to meet the highly demanding airline customers.
The same question should also be asked with developing in-house capabilities. Most common arguments against outsourcing by Technical Managers is that the assumptions that MROs can offer the in house functions to 3rd party customers and the ego to develop internal technical empire. Of course by having all this in house capabilities, it will be easier for Operations Managers to maintain higher visibility over processes and sustain high degree of control which ultimately increase its delivery performance, but at what costs? Do you have the required economies of scale and scope? Is the return on investment acceptable to stakeholders?
With all these criteria and factors in mind, although it is not easy to identify and comparing true performance benefits as to whether an MRO should outsourced a certain capabilities or to develop that in house, informed decisions need to be done based on diligent analysis of facts, industry benchmarking and the existing supply chain surrounding an MRO. The answer that an MRO need to provide is who can better manage true performance that considers costs, quality and lead times. In arrive to a decision-making, we can follow the presented steps below:
- Assess and determine future demand trends and these need to be as accurate as possible.
- Assess core competencies and the organisation strategic alignment and its future business goals – as you may want to seriously consider some capabilities with expected future high demand in house.
- Conduct total cost benefit and comparative analysis. This will be the most difficult part.
- And lastly consider again the organization big picture and make that informed decision.
The above illustration shows a brief example of how we classify core competencies against non-core competencies within an airframe MRO environment. Clear-cut capabilities such as engine MRO and landing gears MRO are two extreme examples that an airframe MRO will not develop, but then again this is all depend on the goal of the organisation and how it wants to capture and control over the market space over its competitors and it goes back to the company’s big picture goal and its strategic alignment. Certain capabilities lie on the gray areas such as the mix of skilled labor and licensed aircraft engineers, technical cleaning and specialised services such as NDT. For example, certain core NDT capabilities are needed for an airframe MRO facility; however, some NDT inspections that are not frequently utilised may be considered to be outsourced.
The above graph shows an example for determining the right level of skilled labor mix within an airframe MRO environment. For an airframe MRO, you will need a set of minimum skilled labor sets from LAEs to mechanics and technicians, however, the forecast demand of aircraft input will determine the numbers and strength of manpower level that you need to retain in house and the rest can be outsourced based on demands. In an airframe MRO, the aircraft maintenance demands is cyclic due to the nature of passenger traffic demands. Airlines will choose to ground their aircraft when there are less passenger traffic, hence the cyclic nature of the graph shown.
This graph shows the number of direct manpower that an MRO need by month across the entire year. You will see that a certain months for example in June and July, the demand drops by about 50%. Some months the MRO requires additional direct manpower based on the forecasted demand. Based on this trends and forecasts, MRO will then decide the level of percentage of direct manpower required against that on short-term contract basis. This will give MRO cost flexibility and turn part of the fixed manpower costs into variable costs. But again, this method is still debatable and it is not easy to arrive to a conclusion. Questions can still be asked on why not address the gap during the low season.